Background
The European Medicines Agency ('EMA') argued in the High Court that the UK's departure from the EU frustrates its 25-year lease of premises in Canary Wharf. The EMA, an agency of the European Union, signed the Lease in 2014 and intended to use the premises as its headquarters for the whole 25 years. However, Regulation (EU) 2018/1718 obliged the EMA to have its headquarters in Amsterdam from 16 November 2019 following the decision of the UK to withdraw from the EU.
The Lease does not have a break clause and therefore unless the EMA is able to sub-let or assign the premises it faces having to pay approximately £500 million in rent over the next 20 years.
The doctrine of frustration operates to set aside a contract because of the effect of a supervening event. The EMA therefore submitted that the Lease was frustrated by a supervening illegality, or by reason of frustration of common purpose.
Decision
It was held that the Lease would not be frustrated on the withdrawal of the UK from the EU; it was not a case of frustration by supervening illegality or frustration of common purpose.
Frustration by supervening illegality?
Subsequent illegality resulting from a change in law has been held to frustrate contracts. However, the supervening illegality must remove all, or substantially all, of the benefit received by one party from the contract.
The EMA contended that the future performance of its obligations under the Lease would be ultra vires and unlawful. It alleged that it had a legal obligation to move its headquarters to Amsterdam, and in any event it was legally impossible for the EMA to have its headquarters in a third country as an EU agency was obliged to have its headquarters in a Member State. Additionally, it submitted that it would be ultra vires to make rental payments for a property that it could not use.
Mr Justice Smith recognised that there were many good reasons why the EMA would choose not to have its headquarters in a third country. However, he held that the future performance of the EMA's obligations under the Lease would not be ultra vires; the EMA has capacity to pay rent and deal with immovable property in a third country, and the EU has capacity to maintain the headquarters of one of its agencies in a third country.
The decision that the EMA has capacity to continue to deal with the premises meant that the EMA’s argument that the Lease was frustrated by supervening illegality necessarily failed. Nevertheless, it was held that, even if the EMA did lack the capacity to meet its future obligations under the Lease 'this is not a matter that the English law of frustration will have regard to'. EU law is not relevant to the question whether subsequent illegality has caused a lease to be frustrated.
Frustration of Common Purpose?
A contract can be frustrated if there was a common purpose between the parties at the time of the agreement which goes beyond what was agreed in the contract and has been rendered 'radically different' by supervening events.
It was held that there was no such common purpose. The EMA was focused on bespoke premises, flexibility as to the term, and low rent. The freehold owners were focused on long-term cash flow, at the highest rate. Mr Justice Smith found that Brexit was not 'relevantly foreseeable' at the time the parties entered into the agreement for lease in 2011, and recognised that the EMA is suffering an unexpected financial hardship. However, the involuntary departure of the EMA from the premises was expressly contemplated in the Lease through the alienation provisions and there was no common view between the parties that the reason for any departure would be relevant to the lease. The fact that the Lease now represented a bad deal for the EMA was not sufficient for frustration to be established.
Implications
The judgment has significant implications for the EMA. If it does not bring a successful appeal, it will need to assign or underlet the premises in order to avoid paying rent in both London and Amsterdam.
It is possible that the EMA will decide to appeal this judgment given the large sum of money at stake. Pending any appeal, this judgment is good news for landlords. It highlights that where Brexit makes a contract uneconomic it is unlikely that parties will be able to rely on the doctrine of frustration to relieve themselves of onerous contractual obligations, and will instead need to look for other ways to mitigate any adverse consequences. Furthermore, a decision that the Lease has been frustrated would have introduced uncertainty into the property market, and would have most likely created a ripple effect with more tenants claiming that their lease has been frustrated as a result of Brexit and other unforeseen events.